5Ways Alibaba Brings Risks From China

Alibaba Group Holding Ltd.’s IPO filing, which may lead to the largest ever public offering, described a highly profitable company still dogged by the risks of China’s volatile business environment. From the country’s less developed legal system to counterfeiting issues and a slowing economy, Alibaba’s filing contained dozens of pages of risks to investing in this quickly growing company.

1Internet is Controlled by the State

Because the government controls China’s Internet, censors could suspend or shut down Alibaba’s websites, or punish the company, if they are deemed “socially destabilizing, obscene, superstitious or defamatory,” the firm said in its filings. And because Internet is run by state-owned telecoms companies, there may be no alternatives if those networks fail to keep up with the country’s growing bandwidth demands.

Agence France-Presse

2China's Legal System 'Inconsistent and Unpredictable'

Alibaba says China’s enforcement of regulations, is “inconsistent and unpredictable.” The patchwork system of laws and internal policies are sometimes “not published on a timely basis or at all,” and can be applied retroactively. That means the company may not know it broke the rules until after the fact. “These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations,” the company said in its filings.

AP

3Insurance is Limited in China

Many forms of insurance are unavailable in China, leaving Alibaba unprotected against business liabilities. For example, Alibaba does not have business interruption or product liability insurance, the company said in its filings. “We cannot assure you that our insurance coverage is sufficient to prevent us from any loss.”

Floods in Chengdu, Sichuan province

Reuters

4China's Economy is Slowing

After decades of explosive growth, China’s economy is in the midst of a slowdown. Gross Domestic Product growth for the first quarter of 2014 was the lowest in 18 months. If the slowdown worsens, Chinese consumers could greatly cut the spending that has brought Alibaba its fortunes, the company said.

Reuters

5Perception of Widespread Counterfeiting

Until 2011, U.S. officials labelled Alibaba’s websites “notorious markets” for counterfeiting and pirating, the company said in its filing. Although Alibaba says it takes measures to protect against counterfeiting, like removing IP infringing product listings, the company acknowledges it may not always act fast enough. Those delays could lead to lawsuits, Alibaba said. “Continued public perception that counterfeit or pirated items are commonplace on our marketplaces or perceived delays in our removal of these items, even if factually incorrect” could hurt the company’s reputation and sales, it said.